Slow-Motion Claims Service Brings Heavy Penalty

January 7, 2019 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin 

December 20, 2018

The 2nd District Appellate Court recently affirmed a finding of bad faith against a first-party insurer for vexatious delay in resolving a building collapse claim.

The insureds in Charter Properties Inc. v. Rockford Mutual Insurance Co., 2018 IL App (2d) 170637 (Nov. 8, 2018), Charter Properties and its tenant, Szechwan Garden, were represented by Kinnally Flaherty Krentz Loran Hodge & Masur P.C. of Aurora. Condon & Cook LLC represented the insurer, Rockford.

Charter Properties owned a building that collapsed in August 2011. It had building replacement coverage of $1.64 million with Rockford. Charter Properties’ tenant, Szechwan Garden, also had coverage with Rockford, but it ultimately was found not to have suffered damages recoverable under its policy.

Over a period of two years after the loss, Rockford voluntarily paid about $1.1 million to Charter Properties to rebuild and another $54,000 for lost rentals. In December 2016, 5½ years after the loss, a jury found that Rockford owed another $118,000 for the building loss and an additional $18,000 for lost rent.

Rockford’s claims adjustment process, however, was delayed, stretched out and not responsive to its insured’s inquiries. One of its adjusters, for example, failed to keep inspection appointments and the company failed to acknowledge coverage for a number of months.

In addition, following submission by Charter Properties in December 2011 of a proof of loss, another adjuster advised that the submission was being held in abeyance pending investigation. Rockford gave no indication when its investigation would be complete, provided no detailed explanation for allocation of payments and gave no direction for the processing of the claim.

In March 2012, Charter Properties filed a complaint with the Illinois Department of Insurance, alleging late payment by defendant. That complaint appeared to prompt some additional payments. In June 2012, however, Rockford claimed that the proof of loss was “premature” because the insured had not yet completed repairs. In July, the Rockford adjuster tasked with determining damages and estimating repairs stopped working on the matter.

In November 2012, Charter Properties filed suit against Rockford. Through an amended complaint, it claimed improper claims handling, breach of contract, bad faith under Section 155 of the Illinois Insurance Code (215 ILCS 5/155) and other causes of action. Rockford made its final payments prior to trial of these causes of action in June 2013.

The December 2016 jury trial resolved the amounts owed by Rockford under the policy. Rockford took no appeal from that judgment.

Charter Properties’ Section 155 claims were then tried separately in a bench trial.

Charter Properties argued, among other things, that Rockford failed to promptly acknowledge communications, failed to conduct a prompt investigation, did not attempt in good faith to settle claims, compelled Charter Properties to sue to recover amounts owing and failed to pay undisputed amounts owed under the policy.

The trial court found for Charter Properties and awarded more than $27,000 in costs, more than $48,000 for attorney fees and more than $30,000 in penalties plus an award of about $24,000 for prejudgment interest. Rockford took this appeal.

Analysis

In an opinion by Justice Michael J. Burke, the 2nd District affirmed. He initially addressed the standard of review applicable to a Section 155 claim. He noted some inconsistency in the case law on the proper standard. But he ultimately held that an abuse-of-discretion standard would apply, although a manifest-weight standard could apply to contested fact findings.

Burke then cited Rockford’s holding the proof of loss in abeyance, its subsequent rejection of the proof of loss as premature and its pulling an adjuster off the project without completing a final estimate as contributing to an unreasonable and vexatious delay in handling the claims.

He further criticized Rockford for not coming up with an estimate of damages and proposing a settlement amount to Charter Properties. Burke said its failure to do so was inconsistent with Section 919.50 of the Illinois Administrative Code (50 Ill. Adm. Code 919.50).

Upon disagreement over the proof of loss, that section required Rockford to provide a reasonable written explanation within 30 days after the investigation and determination of liability was completed.

Here, however, Rockford neither offered a written explanation for a denial nor completed the investigation and determination of liability. Rockford’s improper claims practices, said Burke, supported the Section 155 claim.

The kind of claims handling in which Rockford engaged, moreover, would compel an insured to repair damage without knowing the extent to which the insurer would cover the cost. Burke said that an insurer owes a duty of good faith and fair dealing to provide an estimate so the insured can proceed with repairs knowing the scope of coverage.

Finally, Burke found that Charter Properties was entitled to a remand to determine reasonable fees and costs incurred for Rockford’s post-judgment motion and for the appeal.

The court, therefore, affirmed the award of Section 155 sanctions against Rockford and remanded for a further award of fees and costs.

Key points

  • An abuse-of-discretion standard of review typically applies to an appeal of Section 155 sanctions, although a manifest-weight standard could apply to contested fact findings.
  • Upon disagreement over a proof of loss, a property insurer should provide a reasonable explanation of coverage, within 30 days after its investigation, so that the insured can proceed with repairs knowing the scope of coverage.
  • Improper claims practices support a Section 155 claim.
  • Section 155 sanctions may include an award of fees and costs in connection with a post-judgment motion and an appeal.
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